How much UK redundancy pay is tax-free?

The first £30,000 of genuine redundancy compensation is tax-free (no income tax, no NI). This applies only to the redundancy element - notice pay (worked or PILON), holiday pay, bonus accruals and restrictive covenant payments are taxed as normal salary. Good settlement agreements allocate as much as possible to the ex-gratia (tax-free) element within HMRC limits.

What is statutory redundancy pay in the UK?

Statutory redundancy pay (for 2+ years continuous service): 0.5 weeks pay per year under age 22, 1 week per year 22-40, 1.5 weeks per year 41+. Capped at 20 years service and £700/week (2026/27). Maximum statutory: £700 × 1.5 × 20 = £21,000. Many UK employers pay above statutory, particularly for senior staff or in collective consultations.

Should I take pension contributions instead of redundancy cash?

For redundancy payments above £30,000, redirecting the excess to your pension via employer contribution can save substantial tax. The £30k tax-free portion is best taken as cash. Above £30k, employer pension contributions are tax-free (no income tax, no NI for either side) and fall within your £60,000 Annual Allowance. For higher earners, this can save 40-47% tax on the excess.

Redundancy UK 2026/27 - first 30 days financial response

Last reviewed by the UK Tax Drag editorial team · 12 May 2026 · How we review · Next review due 12 November 2026 · See what changed · Report an error

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In UK redundancy 2026/27: the first £30,000 of redundancy payment is tax-free (income tax and NI). Statutory redundancy pay is 0.5 weeks pay per year of service under age 22, 1 week per year 22-41, 1.5 weeks per year 41+, capped at 20 years and £700/week (April 2024). Settlement agreements can boost payment significantly. Tax-free amount applies only to genuine redundancy, not notice pay or holiday pay. Pension contributions can shelter additional amounts. Universal Credit typically starts within 5 weeks. Don’t accept the first offer - settlement agreements are routinely negotiated upward.

The £30,000 tax-free rule explained

Redundancy payment - what is and isn’t tax-free 2026/27

Key point: the £30,000 tax-free rule applies only to genuine redundancy compensation, not to:

Notice pay (whether worked or paid in lieu) - taxed as normal salary
Holiday pay accrued but unused - taxed as normal salary
Contractual PILON (Payment in Lieu of Notice) - taxed as normal salary since 2018 reforms
Bonus accrued but not yet paid - taxed as normal salary
Restrictive covenant payments - taxed as normal income

Only the "ex gratia" or "statutory redundancy" element is tax-free under the £30,000 rule. Good settlement agreements split the total payment to maximise the tax-free portion within HMRC limits.

Statutory redundancy pay 2026/27

By law, if you’ve been continuously employed for 2+ years, you’re entitled to statutory redundancy pay:

Age at redundancy	Pay per year of service (within band)
Under 22	0.5 weeks pay
22-40	1 week pay
41+	1.5 weeks pay

Caps: maximum 20 years service; maximum weekly pay £700 (2026/27, up from £643 in 2024). Maximum statutory redundancy pay therefore £700 × 1.5 × 20 = £21,000.

Worked example: 45-year-old with 15 years service, earning £45,000

Statutory weekly pay: £45,000 / 52 = £865/week, capped at £700/week
Years 22-40 (in this case 22-40 = 18 years technically, but only first 15 of service): 18-15 = 3 years to age 40 at 1 week × £700 = £2,100. Wait - they’re 45 so all 15 years count toward 1.5 weeks/year
Actually: years served between ages 22-40 = 4 years (45-15=30 yo when started, but joined post-22) so… requires careful date calculation
Realistic figure: 15 × 1.5 × £700 = £15,750 (approximating all service at 41+ rate)

Many employers pay above statutory - particularly for senior staff, in restructurings, or under collective consultation agreements.

The 30-day action plan

Days 1-3Read the settlement agreement carefullyDon’t sign immediately. Most employers expect 7-14 days for the employee to obtain legal advice. The agreement is binding - get it right.

Days 3-7Obtain independent legal adviceRequired by law for settlement agreements to be binding. Employer typically contributes £250-£750 toward legal fees. Solicitor reviews the agreement, identifies negotiation points, and signs the "adviser certificate".

Days 5-14Negotiate the agreementStandard negotiation points: increase ex gratia element; ensure correct split between taxable and tax-free; extend notice period to maximise pension contributions; reference letter wording; bonus/holiday pay treatment; non-compete restrictions.

Days 7-14Plan pension contributionsIf receiving a large redundancy, consider redirecting more of the payment to pension via employer contribution before leaving employment. This can shelter the excess above £30k from tax. Maximum £60k Annual Allowance (or tapered if very high adjusted income).

Days 7-21Sign and date the agreementBoth spouses (if joint mortgage applies), legal adviser signature for the adviser certificate, employer signature. Payment typically 7-21 days after the effective termination date.

Days 14-21Register for Universal Credit if neededApply at gov.uk. First payment typically 5 weeks after application. Useful even for those with savings - the lower threshold for capital is now £6,000.

Days 21-30Set up a runway budgetCalculate how long the redundancy pay + savings cover essential expenses (mortgage/rent, utilities, food). Reduce discretionary spending. Plan job search timeline.

Days 21-30Start job search if intendedUpdate CV, contact recruiters, set up LinkedIn alerts. UK average time to find equivalent role: 3-6 months for mid-career; longer for senior roles.

What to negotiate in the settlement agreement

Negotiation 1: Maximise the ex-gratia (tax-free) portionIf the total payment is £35,000, the split should ideally allocate £30,000 to ex-gratia (tax-free) and £5,000 to taxable elements. Many employers default to allocating less to ex-gratia than possible. Push back.

Negotiation 2: Pension contribution as part of settlementFor senior staff with redundancy above £30k, asking for the excess to be paid as employer pension contribution (which is income-tax-free and NI-free for both sides) instead of cash can be a win-win. Subject to your remaining Annual Allowance.

Negotiation 3: Outplacement / training allowanceMany employers include £1,000-£5,000 outplacement support. If not offered, ask. It’s typically not counted as taxable salary.

Negotiation 4: Notice period treatmentIf you’re put on garden leave and paid normal salary through notice, that period’s pay is taxable. If you can negotiate "extended termination date" and increase ex-gratia, it can be more tax-efficient.

Negotiation 5: ReferencesAgreed wording of reference letter, ideally provided as an annex to the agreement. Avoid vague "facts only" references where possible.

Negotiation 6: Non-compete and confidentialityRestrictive covenants should be reasonable. Excessively long non-compete periods (12+ months) are negotiable. Confidentiality is standard but check the scope.

Benefits to claim

Universal Credit - replaces JSA for most people. Apply within first 30 days. First payment ~5 weeks after application.
Council Tax Reduction - apply via local council. Income-tested.
Mortgage Interest Support - now a loan rather than benefit (introduced 2018). Available after 39 weeks of claim.
Free school meals / Healthy Start vouchers - check eligibility once income drops.
Pension Credit - if state pension age or above and income low.

Common redundancy financial mistakes

Mistake 1: Signing too quickly.Don’t sign a settlement agreement on day 1 just because the meeting is uncomfortable. Take 7-14 days. Use the legal advice that the employer contributes toward.

Mistake 2: Assuming all £30,000 is tax-free.Only the genuine redundancy element. Notice pay and holiday pay are fully taxed. Check the split in the settlement.

Mistake 3: Spending the lump sum on discretionary items.The lump sum is a runway for finding the next role - typically 3-6 months for mid-career. Treat it as savings, not windfall.

Mistake 4: Forgetting to claim Universal Credit.Even with redundancy pay in the bank, you may be entitled to Universal Credit once savings drop below £16,000. Apply early.

Mistake 5: Skipping pension contributions.If the redundancy is large enough to push you over £30k tax-free, pension salary sacrifice on a portion can save 40-47% of the excess.

Calculate your redundancy tax position

The redundancy pay tax calculator shows what you keep after tax on different settlement structures, including the £30,000 tax-free element.

Open the redundancy tax calculator

Sources and references

Statutory redundancy from gov.uk redundancy rights. £30,000 tax-free framework from gov.uk income tax termination payments. Settlement agreements from gov.uk settlement agreements and tax. Universal Credit from gov.uk Universal Credit.

UK Tax Drag is educational and not regulated financial, tax, legal or family advice - see the disclaimer for the full position. For decisions with material legal or family consequences (divorce, probate, separation), specialist advice from a solicitor and/or financial adviser is strongly recommended.

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Redundancy - the first 30 days financial response